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IPE special report May 2018

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Dutch experts reject passive management as 'new default option'

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Passive management in the Netherlands is not becoming the new default option despite the fact active asset management is declining, pension experts have argued.

During the annual congress of IPE sister publication Pensioen Pro, they argued that the approaches of “actively as standard” or “passively unless” were being replaced by measured choices per asset class, and that costs were becoming a serious criterion.

Gaston Siegelaer, senior consultant at Towers Watson, said that while nobody disputed the principle of a performance fee, the scale and – in particular – the structure of a fee should be open to scrutiny.

“Otherwise, the asset manager would receive an expensive call option, while also getting a fixed fee in the case of underperformance,” he said. 

In Siegelaer’s opinion, pension funds should increase their negotiation efforts, “as the market is open for bargaining”.

His view was echoed by John Crees of active manager Columbia Threadneedle, who said underperformance had to be cancelled out in the next 1-2 years, before a performance fee was paid.

During the discussion, it became clear that convergence of interests, costs transparency, meeting a pension fund’s targets and beliefs, as well as the net result, were at least as important as the financial costs of an active strategy.

In the opinion of Chris Wagstaff, trustee at two UK pension funds and head of Pensions and Investment Education at Columbia Threadneedle, the net added value should also be factored into the result of an active strategy.

“Passive and active management are rather complementary,” he said. “Based on their individual investment beliefs, targets, governance budget and risk appetite, pension funds should decide on the best ratio between active and passive strategies.”

Tower Watson’s Siegelaer added that this policy should also apply to individual asset classes.

Pension trustees confirmed the importance of an individual approach and suggested that governance costs were a decisive factor.

Siegelaer noted that, as pension funds’ scale increased following ongoing consolidation – and they could deal with more complex investments – this was not leading to an increase in active investment.

An emerging investment approach was a predominantly passive style combined with a very active one – such as a private equity investment – for a small part of the portfolio.

Christiaan Tromp, chief executive at pensions adviser Ipfos, recommended having 80% of a scheme’s assets actively managed, “as at least 80% of the overall return is a consequence of the strategic allocation”.

“The remaining 20% could be invested under a very active style, with a tracking error of 10% rather than 4%, in order to reap proper benefits from active management,” he said. 

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